I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Thursday, October 15, 2009

Here is my take on the price action since Oct 2. The reason why it kept extending in a surprising way was because there were no clean channels formed between the wave 1 and 2 on Oct 2/3 and the rest of the price.

So I wiped the slate clean and just started drawing channels. And I think I have an option that I like and explains what has been happening.

I think Wave 1 (Minuette) lasted longer than many of us have been counting. And the meat of the rally happened in Wave 3.

Now the are a few cons associated with this count:

1. The channels forming wave 1 and 5 are steeper than wave 3 channel. There is no rule against this, but observations show it is nearly opposite 90% of the time (usually Wave 3 is the steepest and most cleanly impulsive)2. Breadth is by far the most impressive on what turns out to be wave 1 (as the channel would indicate). See my post last night: (Man SPX, Your Brea(d)th Stinks!). No rules being broken, but typically wave 3s have the most breadth.

But this count has (IMO) the most compelling channel story.

But if this really is the final wave of P2 (not saying it is, just saying it is possible), then wouldn't we expect some odd behavior?

P2 should end on low volume and low volatility - check (on this wave).A easy to derive corollary would be breadth would also decrease - again check.

Which means that wave 3 is more or less "going through the motions" to increase the price (on relatively low volume and frankly not that impressive breadth) and we might get a Wave 5 acceleration to steepen the channel again (like I show in the count below).

So something to watch for is low breadth, low volume and more divergence from the VIX while the Wave 5 price accelerates (this would be consistent with a blow-off). If these things happen then I think this is a likely candidate for the final wave in P2.

Here is my take on the price action since Oct 2. The reason why it kept extending in a surprising way was because there were no clean channels formed between the wave 1 and 2 on Oct 2/3 and the rest of the price.

So I wiped the slate clean and just started drawing channels. And I think I have an option that I like and explains what has been happening.

I think Wave 1 (Minuette) lasted longer than many of us have been counting. And the meat of the rally happened in Wave 3.

Now the are a few cons associated with this count:

1. The channels forming wave 1 and 5 are steeper than wave 3 channel. There is no rule against this, but observations show it is nearly opposite 90% of the time (usually Wave 3 is the steepest and most cleanly impulsive)2. Breadth is by far the most impressive on what turns out to be wave 1 (as the channel would indicate). See my post last night: (Man SPX, Your Brea(d)th Stinks!). No rules being broken, but typically wave 3s have the most breadth.

But this count has (IMO) the most compelling channel story.

But if this really is the final wave of P2 (not saying it is, just saying it is possible), then wouldn't we expect some odd behavior?

P2 should end on low volume and low volatility - check (on this wave).A easy to derive corollary would be breadth would also decrease - again check.

Which means that wave 3 is more or less "going through the motions" to increase the price (on relatively low volume and frankly not that impressive breadth) and we might get a Wave 5 acceleration to steepen the channel again (like I show in the count below).

So something to watch for is low breadth, low volume and more divergence from the VIX while the Wave 5 price accelerates (this would be consistent with a blow-off). If these things happen then I think this is a likely candidate for the final wave in P2.

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The binve standard disclaimer:This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions. Any actions taken based on the views expressed in this blog are solely the responsibility of the user. In no event will MTaA or its owner be liable for any decision made or action taken by you based upon the information and/or opinion provided in this blog or in any associated RSS or Twitter Feeds.